subject: This time--it is for real! [print this page] This time--it is for real! This time--it is for real!
In 2005, when the price of gasoline soared at the pump, the oil companies shrugged their collective shoulders, claiming the price hike on Hurricane Katrina which had disabled oil refining capacity in Louisiana was the culprit and as we all learned in High School and college, reduced supply increases prices and the higher the demand, the higher the prices. Of course, despite the number of efforts on the part of the oil industry to explain, I could never fully grasp how gasoline sitting in the tanks at the gas station, gas purchased prior to the hurricane would be impacted by Katrina's damage to refining capacity.
This time however, it just may be for real. As violence escalates in Libya and diplomatic support for ruler Moammar Gadhafi erodes, markets worldwide are on edge.
The price of oil, a key economic indicator, has reached a level not seen since 2008 when economies plunged into recession all over the planet. The unrest in the Middle East that began with the overthrow of the dictatorship in Tunisia and has since quickly spread to Egypt, Yemen, Bahrain, and now Libya has already had an impact on United States markets resulting in the Dow Jones Industrial Average and the Standard and Poors 500 stumbling to new lows. As the price of oil escalates, both the American and global economic recovery, already sluggish at best, is at great risk.
One of the quickest ways to bring down the U.S. economy would be for the price of oil to be suddenly and dramatically increased. Love it or hate it, oil is the very lifeblood of our economic system. Without it in plentiful and cheap supply, our entire economy would slide to a grinding halt. Almost every kind of economic activity in America depends on oil and even a small rise in the price of oil can have a dramatic impact on economic stability and growth. This is exactly why the situation in the Middle East today is so frightening.
A wider view of the situation should in all honesty, include the fact that the people of Tunisia, Egypt, Bahrain and Libya have been living under respective repressive dictatorships for the past half-century and world economy or not, people should have the right to live in a society that allows at least the most basic of human rights, but from a purely economic perspective (and a selfish one as well), the revolution in Libya over the past couple of weeks has caused the price of West Texas Intermediate (WTI) crude to soar more than seven dollars this past Tuesday aloneit closed at $93.57 and Brent crude actually hit $108.78 at the end of the same day.
By way of explanation, according to the International Crude Oil Market Handbook published by the Energy Intelligence Group, there are approximately 161 different internationally traded crude oils. They vary in terms of characteristics such as quality but two crude oils which are either traded themselves or whose prices reflect in other types of crude oil include WTI and Brent.
WTI crude oil is of very high quality and is a natural for the refinement of oil into gasoline. Some oil industry experts refer to WTI as a "sweet" crude oil and Libya is the 18th largest producer of sweet crude in the world.
The Brent Blend by contrast, is a combination of crude oil from 15 different oil fields located in the North Sea and while it too is commonly referred to as"sweet" crude, it is less so than WTI crude. Brent is also ideal for making gasoline and is sometimes refined here in the U.S. typically on the East Coast or the Gulf Coast.
Oil price analysts are now warning that five dollar a gallon gas in the United States by the end of 2011 is a real possibility, particularly if other Middle East oil producing nations such as Saudi Arabia becomes engulfed in the democratic movement that is sweeping across the Arab Middle East. With that region of the world in such a state of utter chaos right now, it is difficult to predict exactly what is going to happen, but almost everyone agrees that if oil prices continue to rise at a rapid pace over the next several months it is going to have a devastating impact on economic growth all over the globe.
Today, the eyes of the oil consuming nations of the world are on Libya. Libya is the 17th largest oil producer overall on the planet and it has the biggest proven oil reserves on the African continent. While this means that Libya actually only produces two percent of the oil in the world today, the reality is that global supplies are so tight right now that even a minor production disruption would have a dramatically negative impact on the price of oil.
Prior to the recent burst of democratic fervor in the Middle East, Libya was producing approximately 1.6 million barrels of oil per day. Now the rest of us are wondering what may happen if the chaos in Libya spreads to other major oil producing nations in the region such as Kuwait (2.5 million barrels per day) or Saudi Arabia, the mightiest of all oil producers at 8.4 million barrels per day.
If the revolution in Libya spreads to Saudi Arabia resulting in a major disruption, it would spell catastrophe for the global economy. In fact, if this did happen, oil prices could catapult to $200 per barrel certainly causing the global economy to go right into cardiac arrest.
The flip side of this looming disaster is not good either. If the flow of oil from Saudi Arabia is significantly disrupted, there is simply not sufficient spare capacity from the rest of the world to make up for the loss. Paul Horsnell, the head of oil research at Barclay's Capital, recently stated that the world does not currently have enough spare capacity to be able to guarantee that an oil "price shock" would not happen. "The world has only 4.5 million barrels-per-day (bpd) of spare capacity, which is not comfortable." Horsnell also said that even in the midst of potential supply challenges, the global demand for oil continues to grow at a robust pace. "In just two years, the world has grown so fast as to consume additional volume equal to the output of Iraq and Kuwait combined."
The constant in this whole crisis is that when gasoline costs more it has a negative effect on economic growth. Almost all economic activities include the use of oil in one form or another. Consequently, when the price of oil begins getting high, it motivates all of us to start cutting back on many of these activities.
